Blackstone funds legal action over soured Bain Capital deal

Blackstone is paying for a law firm known for high-stakes litigation to investigate whether it can recoup losses of more than €200mn on a loan to rival buyout shop Bain Capital.

The $1tn US firm is footing the bill for Pallas Partners to assess whether Blackstone can bring claims against Bain Capital and other parties over the 2020 collapse of Italian tyremaker Fintyre, according to people familiar with the matter.

The arrangement to fund Pallas, founded by a group of former Boies Schiller lawyers, is part of a wider investigation led by the restructuring unit of advisory firm Teneo, which was appointed by the courts to handle Fintyre’s liquidation. 

Teneo, which is being advised by Pallas, is exploring whether it can bring claims against Fintyre’s directors — who include Bain Capital executives — over their actions in the lead-up to the company’s insolvency, one of the people said.

That two of Wall Street’s biggest names are now locked in the dispute highlights the tensions that can arise between private lending funds and the buyout firms whose deals they finance.

It also shows the risks of investing in private credit, a $1.5tn asset class that some market participants have hailed as an almost risk-free route to making money.

Blackstone founder and chair Stephen Schwarzman said last month that double-digit returns could be made lending to some companies “with almost no prospect of loss”, the Financial Times reported. Firms including Apollo, KKR and Carlyle have also increasingly focused on credit, in a shift away from the leveraged buyouts that used to be their main focus. 

Blackstone has yet to recover any of the more than €200mn it lent to Fintyre, however, and faces the prospect of total losses if it is unable to do so through legal action. 

Bain Capital acquired Fintyre in March 2017 with the goal of transforming it into the continent’s largest tyre group. Blackstone provided more than €200mn of debt funding for the deal.

A combination of equity from Bain and debt from Blackstone was supposed to turbocharge Fintyre’s growth by helping it acquire other businesses across Europe.

The plan worked at first. By 2019, acquisitions of Sardinia-based La Genovese Gomme and German business Reifen Krieg had doubled revenues to nearly €900mn, according to company filings that said Fintyre was in good financial health. 

“The directors considered it unlikely that there would be any breaches to the financial covenants contained with the senior facilities agreement and the bond note in the 12 months from the date of signature of the financial statements,” the company wrote in the accounts published in October 2019.

Fintyre’s collapse less than a year later came as a surprise to lenders, which typically have the chance to provide rescue financing to keep a company that runs into trouble afloat and take the keys. 

The tyre group’s demise wiped out Bain’s investment, a not uncommon occurrence in the world of private equity investing, where losses on one deal can be made up for by gains elsewhere in their portfolios.

More problematically, Blackstone’s credit arm was owed €230mn by a company now in liquidation. Prospects of recouping the money were further dimmed by the fact that Blackstone sat behind another creditor group owed €65mn. 

In contrast to equity investors, credit funds usually make money via a contractual return on money they have lent. But if they take a loss, it is much harder to recoup the money, as there is not usually much upside to direct lending beyond getting a loan repaid with interest.

The losses incurred by Blackstone, and a perception among its senior management that Bain had not been transparent in the period leading up to the insolvency, led to Blackstone executives complaining to Bain Capital, according to people familiar with the matter.

It also led to tensions between executives in Blackstone’s European lending business and Bain’s private equity unit, some of the people said.

Three years after the company went bust, Blackstone is still trying to recoup its investment.

The creditor group ranking ahead of Blackstone received a £1.4mn payment in June, leaving them more than £50mn short. 

Liquidators and Pallas are still working to “assess whether there are any matters that might lead to a recovery for the benefit of creditors, such as potential claims that may be brought against parties either connected to or who have had past dealings with the company,” liquidators wrote.

Founded in 2022, Pallas works on high-profile disputes and is currently representing two groups of Credit Suisse bondholders who were wiped out by UBS’s takeover of the bank in March.

Blackstone has been reshaping its credit arm away from some of the riskier deals that first made its name. Since the Fintyre deal, both of its European credit heads have left. 

The firm recently merged its credit unit with its insurance business, with veteran Blackstone credit executive Dwight Scott becoming chair of the new division.

By June this year, the fund that did the Fintyre deal had generated an internal rate of return of 2 per cent, according to a Blackstone filing.

Blackstone, Bain Capital, Pallas and Teneo all declined to comment.